Five top risks facing financial services firms

Financial services firms – banks, credit unions and insurance companies and brokers – deliver services that are the lifeblood of the U.S. economy, backing mortgages, financing business ventures and underwriting insurance risks. For such organizations, accepting prudent financial risks and managing them effectively are their core competencies. But at the same time, financial services businesses face a variety of their own operational risks just as do all other businesses.  Risks that need to be understood, assessed and managed.

Based on Zurich’s own claims data and external insights, the following are among the top business risks that many mid-sized financial services businesses may face in order to ensure their ability to effectively serve clients in a volatile business environment:

5. International exposures

Increasingly, mid-sized financial services firms are looking beyond their national borders for new business horizons. When engaging in business activities with international dimensions – whether managing foreign transactions and assets or protecting employees when traveling abroad – financial services firms will face a variety of often unanticipated risks associated with local regulations and business conventions.

For this reason, organizations need to engage risk management and insurance expertise from companies delivering the experience and global presence to understand local regulatory environments. Also needed is access to tools and resources to manage the often thorny trade credit and political risks inherent in today’s volatile global economy.

4. Cybersecurity

All businesses face threats of network intrusions, malware and other high-tech hazards, but financial services firms may be at elevated risk given the trust and financial assets placed with them by individuals and businesses.

Financial services businesses must be aware of the growing range and dangers of cyber risks traversing the internet, as well as other points of entry such as email phishing, social engineering and other tactics. Networks need to be evaluated and assessed to determine whether undetected breaches have already occurred. Ongoing monitoring resources and professional advice should be accessed to help intercept and prevent future cyberattacks. Insurance solutions such as Zurich’s Cyber Insurance Policy can also provide essential, frontline defense against the financial impacts of cyberattacks.

3. Workplace violence

In recent times, the specter of workplace violence has become a growing worry for all businesses, from corporations to houses of worship. Banks and other financial institutions have the same concerns as other organizations, with the added dimension of being prime targets for armed criminals looking for quick and easy paydays.

Experts have identified four types of workplace violence occurrences that may impact banks and other financial services businesses:¹

• Armed robberies during which an individual with no connection to the business enters with criminal intent. According to FBI Bank Crime Statistics, banks, savings & loans and credit unions accounted for almost 3,000 robberies in 2018.²
• Violence directed at employees by a customer or others to whom the business provides service.
• Violence against co-workers by a present or former employee.
• Violence by someone who doesn’t work at the institution but has a personal relationship with an employee.

While financial services businesses handling large amounts of cash are more prone to robberies than other businesses, they share the other workplace violence risks with all other segments. And they share the responsibility to reduce the risks by having clear and broad definitions of what constitutes workplace violence, including stalking, bullying or any other conduct that is intended to cause harm to persons or property.

2. Bank-owned property

During normal times, banks, credit unions and other mortgage holders must manage the risks associated with maintaining the value of foreclosed and vacant properties. It simply goes with the territory. However, during a financial crisis driven by a global pandemic, the challenge has grown dramatically.

Vacant property is prone to potential risks that can reduce values and result in significant financial loss. Clearly, vandalism is a risk common to vacant properties. Local authorities must be notified of newly vacant, bank-owned properties so they can monitor for criminal activity.

Maintaining the external appearance of a vacant property can be important in reducing the risks of vandalism. Landscaping activities such as lawn maintenance and shrubbery trimming should continue. The property should be kept free of physical hazards, such as broken pavements, windows and railings, that might cause injuries resulting in civil liability if a police officer, firefighter or maintenance worker is injured.

Obviously, internal systems such as heating, plumbing, insulation and other equipment protecting a property from weather extremes need to be kept in good condition. Roof decks, gutters, drains and other external features need to be inspected and deficiencies corrected. Finally, smoke detectors and remote monitoring systems must be maintained, and all potential combustibles must be removed from the surrounding property.

Because insurance maintained by the former owners or tenants will no longer be in effect, financial services businesses must secure force-placed property coverage to protect their interests in mortgaged properties. This coverage will protect the institution's interests in a mortgaged property undergoing foreclosure procedures or investment properties which are owned by an institution and scheduled on the policy.

1. Directors and Officers Liability

Directors and Officers (D&O) insurance protects the assets of corporate directors and officers against lawsuits by employees, customers, stockholders and others when their actions or decisions are alleged to have caused damages. D&O policies cover defense costs, settlements, and judgments arising from lawsuits and wrongful allegations brought directors and corporate officers.

According to Zurich Claims data, financial services organizations, including banks and credit unions, as well as real estate firms, account for 64% of the top 10 general liability claims in terms of frequency. And at a time when social inflation is driving growing litigation and “nuclear” court verdicts, directors and officers of financial services firms need D&O insurance coverages to protect against the risks of an increasingly litigious world.

Resilience – your best investment

These are just some of the risks mid-sized financial services companies may face in today’s uncertain business environment, not a suggestion that these are the only ones. But by being aware of the full continuum of specific business risks facing financial services and responding to them with prudent risk management and insurance solutions, banks, credit unions and others can ensure resilience that will continue to earn the trust customers have placed in them.